Understanding Annual reports

Annual reports help shareholders understand how their investment is doing.   They are also a good starting point for people who are considering buying shares in a company for the first time. 

There are two versions of BT Group’s annual report: the Annual Review, and the Annual Report and Form 20-F.  Both are available in printed form and online (via the internet). 

Many individual shareholders choose to receive the Annual Review, which is a shortened version of the Annual Report and Form 20-F.  It provides summary versions of the most important sections of the full report. 

Most professional investors prefer the full report, which provides more detailed information.  It includes the Form 20-F, which is information required by the United States authorities as a condition of the listing of BT Group’s shares on the New York Stock Exchange (in the form of American Depositary Receipts).

The annual reports of large companies like BT Group provide information required by company law, stock exchange regulations and official accounting standards.  Many companies include extra information for shareholders and others. 

Annual reports traditionally begin with a review of the year from the company’s Chairman and Chief Executive. These are the most widely read parts of annual reports because they provide a short summary of events during the year.  Most reports also contain a longer and more detailed review of the performance of the business.   Many companies include information on other issues of importance, such as new products and services, the environment and social responsibility.  There are also statements that describe how the directors maintain control over the company (corporate governance) and how they are paid (directors’ remuneration). 

The financial accounts follow the written statements.  The most important parts of the accounts are the income statement, the balance sheet, the cash flow statement and the auditor’s report. 

The income statement shows how much profit the company has made during the year, compared to the previous year.  It shows the company’s sales (revenue), and the profit that remains after expenses have been allowed for. 

The balance sheet sums up the company’s financial position on the final day of its financial year, in comparison to the previous year.  It shows what the company owns (its assets), what it owes (its liabilities) and its ‘shareholders’ equity’, the sum that would be left if the company sold all its assets and paid all its liabilities. 

The cash flow statement shows where the cash flowing through the business has come from and how it has been used, compared to the previous year.  It is an important measure of the company’s financial strength. 

By law, companies must have their accounts examined by independent auditors, according to standards laid down by their regulators.   The auditors’ report to shareholders is an important safeguard: it contains their opinion on the company’s financial position and the procedures used to prepare the accounts.

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